June 28, 2013

New EU Plan Will Make Every Bank Account In Europe Vulnerable To Cyprus-Style Wealth Confiscation

Did you actually believe that they were not going to use the precedent that they set in Cyprus?  On Thursday, EU finance ministers agreed to a shocking new plan that will make every bank account in Europe vulnerable to Cyprus-style bail-ins.  In other words, the wealth confiscation that we just witnessed in Cyprus will now be used as a template for future bank failures all over Europe.  That means that if you have a bank account in Europe, you could wake up some morning and every penny in that account over 100,000 euros could be gone.  That is exactly what happened in Cyprus, and now EU officials plan to do the same thing all over Europe.  For quite a while EU officials insisted that Cyprus was a "special case", but now we see that was a lie.  International outrage over what happened in Cyprus has died down, and now they are pushing forward with what they probably had planned all along.  But why have they chosen this specific moment to implement such a plan?  Are they anticipating that we will see a wave of bank failures soon?  Do they know something that they aren't telling us?

Amazingly, this announcement received very little notice in the international media.  The fact that bank account confiscation will now be a permanent part of the plan to bail out troubled banks in Europe should have made headline news all over the globe.  The following is how CNN described the plan...
European Union finance ministers approved a plan Thursday for dealing with future bank bailouts, forcing bondholders and shareholders to take the hit for bank rescues ahead of taxpayers. 
The new framework requires bondholders, shareholders and large depositors with over 100,000 euros to be first to suffer losses when banks fail. Depositors with less than 100,000 euros will be protected. Taxpayer funds would be used only as a last resort.
According to this new plan, bondholders will be the first to be required to "contribute" when a bank bailout is necessary.

Do you want to guess what that is going to do to the price of European bank bonds?

Shareholders of the bank will be the next in line to get hit when a bank bailout happens.

After that, they will go after those that have more than 100,000 euros in their bank accounts.

EU officials say that such a plan is needed because bailing out banks with taxpayer money was creating too many problems...
The European Union spent the equivalent of a third of its economic output on saving its banks between 2008 and 2011, using taxpayer cash but struggling to contain the crisis and - in the case of Ireland - almost bankrupting the country. 
But a bailout of Cyprus in March that forced losses on depositors marked a harsher approach that can now, following Thursday's agreement, be replicated elsewhere.
Oh wonderful - the "Cyprus solution" can now be "replicated" everywhere in Europe.

This plan will now be submitted to the European Parliament for final approval.  The goal is to have this plan finalized by the end of this year.

If you have a bank account in Europe with over 100,000 euros in it, get your money out now.
I am not sure how else to say it.

In Cyprus, there were retirees and small businesses that lost hundreds of thousands of euros overnight.

Do not let that happen to you.

And without a doubt, we are going to see a lot of banks fail in Europe over the next few years.  This will especially be true once the next great financial crisis strikes.

But even though we haven't even gotten to the next great financial crisis yet, the economic depression in Europe just continues to get even worse.  Just consider these facts...

-Car sales in Europe have hit a 20 year low.

-Overall, the unemployment rate in the eurozone is sitting at 12.2 percent.  That is a brand new all-time record high.

-An average of 134 retail outlets are shutting down in Italy every single day.  Overall, 224,000 retail establishments have closed down in Italy since 2008.

-It is being projected that Italy will need to ask for an EU bailout within 6 months.

-Consumer confidence in France has dropped to an all-time low.

-The unemployment rate in France is up to 10.4 percent.  That is the highest that it has been in 15 years.

-Government is now responsible for 57 percent of all economic output in France.

-In May, household lending in Europe declined at the fastest pace in 11 months.

-During the first quarter, disposable income in the UK declined at the fastest pace in 25 years.

-It is being projected that the unemployment rate in Spain will hit 28.5 percent next year.

-Just a few years ago, the percentage of bad loans in Spain was under 2 percent.  Now it is sitting at 10.87 percent.

-The national debt in Spain has grown by 19.1 percent over the past 12 months alone.

-The Greek government says that the Greek economy will shrink by 4.5 percent this year.

-It is being projected that the unemployment rate in Greece will rise to 30 percent in 2014.

And it certainly does not help that China has essentially declared a trade war on Europe.  That is not going to help struggling European industries at all.

I hope that more Americans will start paying attention to what is happening in Europe.  The crippling economic problems that are sweeping across that continent will come here too.

And at some point there is a very good chance that we will also see Cyprus-style bank account confiscation in this country.

So don't put all of your eggs in one basket.  It is good to have your assets spread around a bunch of different places.  That makes it much harder for them to be wiped out all at once.

What we are watching in Europe right now is really unprecedented in modern times.  They are declaring open season on large bank deposits.  In the end, a lot of people in Europe are going to lose a lot of money.

Make sure that you are not one of them.


June 27, 2013

Regulatory Looting, Promontory-Style: Botched Foreclosure Reviews Alone Generate More than Double Goldman’s Revenues per Employee

It’s really hard to convey a sense of how utterly grotesque the looting that Promontory Financial Group conducted on the misnamed Independent Foreclosure Reviews. Readers may recall that these reviews were set up as part of a 2011 settlement by the Office of the Comptroller and the Currency and the Fed with 14 major servicers. The reviews were shut down abruptly at the very beginning of this year due to revelations about lack of independence of the reviews (in Bank of America’s case, a large chunk of the review work was under the direct control of the bank, with the “review” by Promontory characterized by numerous whistleblowers as process of denying that any harm to borrowers took place) and burgeoning consultant bills. And as Congressional hearings revealed, the money spent on the reviews was a complete waste (well, except for the banks, for whom it was a cheap “get out of damages” card). The banks and the OCC decided which homeowners would get how much though a process that clearly had to be arbitrary (it was later revealed that the people who got the higher payouts were the ones who were further along in the review process, meaning it had nothing to do with any assessment of harm). A USA Today article yesterday revisits the topic of how paltry and arbitrary the payments were:
Almost all the checks have gone out from a settlement that government regulators initially touted in 2011 as their most aggressive effort to root out banks’ errors, hold them accountable and right the wrongs done to many homeowners. The outcome falls short of the vindication many borrowers expected… 
The payouts, far from closing the books on an economic catastrophe that rocked millions of households in the worst years of the Great Recession, have instead reignited old feelings of anger and frustration. As Bailey and others like him see it, the banks and the government have at last put a price on foreclosure injustices — and it’s too low.
It also contains numerous examples as well as useful statistics, consistent with numerous reader complaints at NC. For instance:
Max Caycoya, 42, an engineer in Houston, got a $500 payout that left him angry and confused. He says he had a loan modification request denied in 2010, so he expected $6,000 for being in the “modification request denied” category. The $500 meant that he landed in either the “all other loans” or “modification request approved” category.
“This makes no sense to me,” Caycoya says. 
John Failla, 47, a casino supervisor in Tucson, was denied a loan modification from Bank of America, he says. He expected $6,000 and got $500. 
BofA says Failla was never denied a loan modification because he was never considered for one. The bank says Failla, after requesting a modification, called to say he’d decided to pursue a short sale. 
Failla disputes that. He says he filled out a loan modification application and pursued a short sale only after the modification was denied. He’s complained to BofA about his payout. “I’d like my other $5,500,” he says.
Let’s contrast the doubly-shafted borrowers with the Promontory Financial Group, which handled the reviews for three servicers: Bank of America, Wells Fargo, and PNC. We had whistleblower at Bank of America and PNC report on how little supervision Promontory did and how utterly confused and chaotic the process was. We covered this terrain extensively in a series of posts that became an e-book, so we’ll provide one extract as a reminder:
As we documented in detail in our earlier posts, the result was that the work of going through six of the seven substantive tests was performed on Bank of America premises with personnel under the control of Bank of America. Promontory did provide the software with the endlessly-revised questions that the personnel at Bank of America tried to answer, along with various information guides. It visited the staff in biggest center, Tampa Bay, only four times in thirteen months, and its interaction with the people doing the review work was extremely limited. In other words, this was not a Promontory foreclosure review, it was a Promontory-decorated Bank of America foreclosure review. 
By contrast, the project at PNC was modest in scale, yet it proved be well beyond the managerial capabilities of Promontory. At a bank with a comparatively small servicing portfolio, Promontory put in place a team composed almost entirely of contractors (140 to 150 when staffed up) only one Promontory employee in a managerial role, the managing director on the project, Michael Joseph.** PNC hired even more contractors to do clerical work to support this team’s efforts. 
Anyone who has worked in a real organization can appreciate how insane this arrangement was. One person cannot effectively lead 150 people, particularly on a customized project operating in several locations. The only professional firm activity that routinely has such extreme ratios of partners to working oars is foreclosure mills…
Consultant D: – essentially what I witnessed in the 10 to 12 months was the fact that Promontory did not manage the project. Their effort to manage the project with any real due diligence, to me, they just, they fell short from A to Z. For example, from the time I joined the project to the time it ended, I saw the leader of the PNC part of the project two times, and the total time was less than 10 minutes….After concluding that there were too many individual specialized pieces of a loan review to achieve consistency across the large number of reviewers, PNC pushed an attempt to break the reviews up into individual subsets that could address particular borrower harm issues, with the intent of bringing them all together at the end. That was the plan, but then they couldn’t figure out how they were going to bring all the subsets together at the end and gave up on that approach. Then, complaints as to “lack of independence” grew louder, and the OCC and Promontory were faced with junking what limited deliverables they had after 10 months of work, and starting all over with review procedures designed and blessed by Promontory alone. While that could have been done, the design stage was going to require a considerable amount of time, energy, and beta testing to get right.
Step back and understand what that section says. After 10 months, there was virtually nothing to show for this effort. Promontory had to junk what little it had done at PNC because the work to date was insufficiently “independent”.
What are the rewards for bank-favoring incompetence? Lucrative indeed. Promontory disclosed that its fees across its three clients was $927 million. This was for a project where the engagement letters were signed in early September 2011 and the project was aborted the first week of January 2013. That’s 16 months, but since the project had an initial detailed work planning and ramp-up phase, plus the clients had to organize how to get information to the consultants, it’s a conservative assumption that the fees covered 12 to 14 months at full staffing levels. We’ll use 14 months to be conservative. That translates to $795 million on an annual basis, so call it $800 million applicable to calendar 2012. Now remember, not all of Promontory was turned over to this activity; in fact, one of the major problems was it hired lots of contract workers (on which it charged large markups).
But let’s run some crude comparisons:
Promontory, according to American Banker, has 400 employees. So the project revenue per head was $2 million dollars. Goldman Sachs in 2012, by contrast, has $28.8 billion in revenues for 33,000 employees, or a mere $873,000 in revenues per head. And Goldman uses capital and has lots of infrastructure (back office, IT systems) and takes market risk. 
Promontory said it reviewed 250,000 loan files. So it spent $3,700 per file and didn’t produce any usable conclusions. And that number gives a misleading impression, since at Bank of America, over 100,000 files were reviewed mainly by temps hired directly by the bank, with only minimal involvement by Promontory. So the cost on files where Promontory did most of the work was considerably higher. Contrast these fees to borrower payouts averaging around $850.
The revelation of Promontory’s fees was in response to a request from the Senate Banking Committee. The firm attempted to defend the pay for non-performance:
Konrad Alt, a Promontory managing dierctor who was a top OCC official in the 1990s, wrote that the company ”performed several million hours of labor” and “an amount of information comparable in magnitute to all the written materials held by the Library of Congress.”
This opens up the question of how accurate these statements to Congress are. Promontory most assuredly did not generate meaningful amounts of information; it’s attempting to take credit for information in bank systems. Moreover (and one needs to see the entire letter, not the extract) but the firm most assuredly did not perform several million hours of work; Promontory hired large numbers of poorly supervised contract workers.

While Promontory’s billings were the most egregious, it did have some competition. Deloitte got a stunning $465 million for JP Morgan. Given that the bank bought two companies with famously lousy loans that it wound up servicing, Bear Stearns and WaMu, the results seem to reflect a Promontory-level job (even though Promontory handled Wells which also was a large servicer, whistleblower reports from Wells suggest that the bank kept Promontory on a tighter leash by setting up borrower-requested review in such a way as to reject virtually all letters) than BofA did, which if true, would have led to much lower costs.

Unfortunately, it’s clear that the banks, the reviewers, and the OCC have done an effective job of putting a shroud over this travesty. The OCC appallingly can stymie requests for details that might the banks or the consultants as confidential supervisory information and prevent disclosure. The only real remedy is to inflict meaningful costs on the OCC for protecting the perps, and that is by getting the agency shut down.


June 26, 2013

The Trigger Has Been Pulled And The Slaughter Of The Bonds Has Begun

What does it look like when a 30 year bull market ends abruptly?  What happens when bond yields start doing things that they haven't done in 50 years?  If your answer to those questions involves the word "slaughter", you are probably on the right track.  Right now, bonds are being absolutely slaughtered, and this is only just the beginning.  Over the last several years, reckless bond buying by the Federal Reserve has forced yields down to absolutely ridiculous levels.  For example, it simply is not rational to lend the U.S. government money at less than 3 percent when the real rate of inflation is somewhere up around 8 to 10 percent.  But when he originally announced the quantitative easing program, Federal Reserve Chairman Ben Bernanke said that he intended to force interest rates to go down, and lots of bond investors made a lot of money riding the bubble that Bernanke created.  But now that Bernanke has indicated that the bond buying will be coming to an end, investors are going into panic mode and the bond bubble is starting to burst.  One hedge fund executive told CNBC that the "feeling you are getting out there is that people are selling first and asking questions later".  And the yield on 10 year U.S. Treasuries just keeps going up.  Today it closed at 2.59 percent, and many believe that it is going to go much higher unless the Fed intervenes.  If the Fed does not intervene and allows the bubble that it has created to burst, we are going to see unprecedented carnage.

Markets tend to fall faster than they rise.  And now that Bernanke has triggered a sell-off in bonds, things are moving much faster than just about anyone anticipated...
Wall Street never thought it would be this bad. 
Over the last two months, and particularly over the last two weeks, investors have been exiting their bond investments with unexpected ferocity, moves that continued through Monday. 
A bond sell-off has been anticipated for years, given the long run of popularity that corporate and government bonds have enjoyed. But most strategists expected that investors would slowly transfer out of bonds, allowing interest rates to slowly drift up.
Instead, since the Federal Reserve chairman, Ben S. Bernanke, recently suggested that the strength of the economic recovery might allow the Fed to slow down its bond-buying program, waves of selling have convulsed the markets.
In particular, junk bonds are getting absolutely hammered.  Money is flowing out of high risk corporate debt at an astounding pace...
The SPDR Barclays High Yield Bond exchange-traded fund has declined 5 percent over the past month, though it rose in Tuesday trading. The fund has seen $2.7 billion in outflows year to date, according to IndexUniverse. 
Another popular junk ETF, the iShares iBoxx $ High Yield Corporate Bond, has seen nearly $2 billion in outflows this year and is off 3.4 percent over the past five days alone.
Investors pulled $333 million from high-yield funds last week, according to Lipper.
While correlating to the general trend in fixed income, the slowdown in the junk bond business bodes especially troubling signs for investment banks, which have relied on the debt markets for fully one-third of their business this year, the highest percentage in 10 years.
The chart posted below comes from the Federal Reserve, and it "represents the effective yield of the BofA Merrill Lynch US High Yield Master II Index, which tracks the performance of US dollar denominated below investment grade rated corporate debt publically issued in the US domestic market."  In other words, it is a measure of the yield on junk bonds.  As you can see, the yield on junk bonds sank to ridiculous lows in May, but since then it has been absolutely skyrocketing...

So why should the average American care about this?

Well, if the era of "cheap money" is over and businesses have to pay more to borrow, that is going to cause economic activity to slow down.

There won't be as many jobs, part-time workers will get less hours, and raises will become more infrequent.

Those are just some of the reasons why you should care about this stuff.

Municipal bonds are being absolutely crushed right now too.  You see, when yields on U.S. government debt rise, they also rise on state and local government debt.

In fact, things have been so bad that hundreds of millions of dollars of municipal bond sales have been postponed in recent days...
With yields on the U.S. municipal bond market rising, local issuers on Monday postponed another six bond sales, totaling $331 million, that were originally scheduled to price later this week. 
Since mid-June, on the prospect that the Federal Reserve could change course on its easy monetary policy as the economy improves, the municipal bond market has seen a total of $2.6 billion in sales either canceled or delayed.
If borrowing costs for state and local governments rise, they won't be able to spend as much money, they won't be able to hire as many workers, they will need to find more revenue (tax increases), and more of them will go bankrupt.

And what we are witnessing right now is just the beginning.  Things are going to get MUCH worse.  The following is what Robert Wenzel recently had to say about the municipal bond market...
Thus, there is only one direction for rates: UP, with muni bonds leading the decline, given that the financial structures of many municipalities are teetering. There is absolutely no good reason to be in municipal bonds now. And muni ETFs will be a worse place to be, given this is relatively HOT money that will try to get out of the exit door all at once.
But, as I wrote about yesterday, the worst part of the slaughter is going to be when the 441 trillion dollar interest rate derivatives time bomb starts exploding.  If bond yields continue to soar, eventually it will take down some very large financial institutions.  The following is from a recent article by Bill Holter...
Please understand how many of these interest rate derivatives work.  When the rates go against you, “margin” must be posted.  By “margin” I mean collateral.  Collateral must be shifted from the losing institution to the one on the winning side.  When the loser “runs out” of collateral…that is when you get a situation similar to MF Global or Lehman Bros., they are forced to shut down and the vultures then come in and pick the bones clean…normally.  Now it is no longer “normal,” now a Lehman Bros will take the whole tent down.
Most people have no idea how vulnerable our financial system is.  It is a house of cards of risk, debt and leverage.  Wall Street has become the largest casino in the history of the planet, and the wheels could come off literally at any time.

And it certainly does not help that a whole host of cyclical trends appear to be working against us.  Posted below is an extended excerpt from a recent article by Taki Tsaklanos and GE Christenson...

Charles Nenner Research (source)

Stocks should peak in mid-2013 and fall until about 2020.  Similarly, bonds should peak in the summer of 2013 and fall thereafter for 20 years.  He bases his conclusions entirely on cycle research.  He expects the Dow to fall to around 5,000 by 2018 – 2020.
Kress Cycles by Clif Droke (source)

The major 120 year cycle plus all minor cycles trend down into late 2014.  The stock market should decline hard into late 2014.

Elliott Wave Cycles by Robert Prechter (source)

He believes that the stock market has peaked and has entered a generational bear-market.  He anticipates a crash low in the market around 2016 – 2017.
Market Energy Wave (source)

He sees a 36 year cycle in stock markets that is peaking in mid-2013 and down 2013 – 2016.  “… the controlling energy wave is scheduled to flip back to negative on July 19 of this year.”  Equity markets should drop 25 – 50%.

Armstrong Economics (source)

His economic confidence model projects a peak in confidence in August 2013, a bottom in September 2014, and another peak in October 2015.  The decline into January 2020 should be severe.  He expects a world-wide crash and contraction in economies from 2015 – 2020.
Cycles per Charles Hugh Smith (source)

He discusses four long-term cycles that bottom roughly in the 2010 – 2020 period.  They are:  Credit expansion/contraction cycle;  Price inflation/wage cycle; Generational cycle;  and Peak oil extraction cycle.

Harry Dent – Demographics (source)

Stock prices should drop, on average for the balance of this decade.  Demographic cycles in the United States (and elsewhere) indicate a contraction in real terms for most of this decade.

I was stunned when I originally read through that list.

Is it just a coincidence that so many researchers have come to such a similar conclusion?

The central banks of the world could attempt to "kick the can down the road" by buying up lots and lots of bonds, but it does not appear that is going to happen.

The Federal Reserve may not listen to the American people, but there is one institution that the Fed listens to very carefully - the Bank for International Settlements.  It is the central bank of central banks, and today 58 global central banks belong to the BIS.  Every two months, the central bankers of the world (including Bernanke) gather in Basel, Switzerland for a "Global Economy Meeting".  At those meetings, decisions are made which affect every man, woman and child on the planet.

And the BIS has just come out with its annual report.  In that annual report, the BIS says that central banks "cannot do more without compounding the risks they have already created", and that central banks should "encourage needed adjustments" in the financial markets.  In other words, the BIS is saying that it is time to end the bond buying...
The Basel-based BIS - known as the central bank of central banks - said in its annual report that using current monetary policy employed in the euro zone, the U.K., Japan and the U.S. will not bring about much-needed labor and product market reforms and is a recipe for failure. 
"Central banks cannot do more without compounding the risks they have already created," it said in its latest annual report released on Sunday. "[They must] encourage needed adjustments rather than retard them with near-zero interest rates and purchases of ever-larger quantities of government securities."
So expect central banks to start scaling back their intervention in the marketplace.

Yes, this is probably going to cause interest rates to rise dramatically and cause all sorts of chaos as the bubble that they created implodes.

It could even potentially cause a worse financial crisis than we saw back in 2008.
If that happens, the central banks of the world can swoop in and try to save us with their bond buying once again.

Isn't our system wonderful?


June 25, 2013

BIS Demands Global Depression?

BIS fears fresh bank crisis from global bond spike Soaring bond yields across the world threaten trillion of dollars in losses for investors and a fresh financial crisis unless banks are braced for the shock, the Bank Settlements has warned ... Marcus Nunes from the Fundação Getúlio Vargas in São Paulo said the report "reeks of Austrianism", referring to the hard-line view of the Austrian School that debt busts lead should be allowed to run their course. Prof Nunes fears a repeat of 1937 when premature tightening aborted recovery from the depression. – UK Telegraph

Dominant Social Theme: With Ate by his side come hot from hell, Shall in these confines with a monarch's voice Cry 'Havoc,' and let slip the dogs of war ...

Free-Market Analysis: There is no avoiding what the Bank for International Settlements has just demanded. The top men at that august institution are demanding a global depression.

And just to ensure that people especially in the West are thoroughly confused as they slip into starvation and despair, Austrian economics has been brought back into the argument – as we can see from the above excerpt.

The idea, marvelously literate and mercilessly dispassionate, is that when one prints money – as one can in the modern era – to prop up failing institutions, one only prolongs the pain of an economic slump.

This is absolutely true but to blame "Austrianism" for this – and Austrianism is a term of contempt, as the correct phrase is Austrian economics – is entirely disingenuous. Just because one understands the reality of economics doesn't mean one is supportive of the kind of ruin that the BIS now demands.
Free-market proponents didn't cause this disaster. Central bankers did, with their insistence on price fixing and monetary expansion. Determined to control all the elements of globalism, and keep them in place, they printed tens of trillions to stop a meltdown that must inevitably occur. By stretching it out, they prolong the agony of unemployment and economic dysfunction for billions.

Here's more from the article:

The markets suffered a global sell-off of assets, including bonds, following a signal from the US Federal Reserve that QE could end by mid-2014 ... The Swiss-based institution said losses on US Treasury securities alone will reach $1 trillion if average yields rise by 300 basis points, with even greater damage in a string of range from 15pc to 35pc of GDP in France, Italy, Japan, and the UK.
"Such a big upward move can happen relatively fast," said the BIS in its annual report, citing 1994 ... "Someone must ultimately hold the interest rate risk. As foreign and domestic banks would be among those experiencing the losses, interest rate increases pose risks to the stability not executed with great care."

The warning comes after US Federal Reserve set off the most dramatic spike in US borrowing costs for over a decade last week with talk of early exit from quantitative easing through the global system. The yield on 10-year Treasuries has jumped 80 basis points since the Fed began to talk tough two months ago, closing at 2.51pc on Friday. The side-effect has been a run on emerging markets, a reversal of hot-money inflows into China, and fresh debt jitters in Portugal, Spain, and Italy.

Nomura said the US yield cracks in Europe once again" and short-circuit the US housing recovery. The BIS, the lair of central bankers, said authorities must press ahead with monetary tightening regardless of bond worries, warning that QE and zero rates are already doing more they go on, the greater the dangers. "Central banks cannot do more without compounding the risks they have already created," it said in what amounts to an full assault on the credibility of ultra-stimulus policies.

Describing monetary policy as "very accommodative globally" , it warned that the "cost-benefit balance is inexorably becoming less and less favourable." The BIS appeared call for combined monetary and fiscal tightening, prompting angry warnings from economists around the world that this risks a second leg of the crisis and "It is a resurgence of extreme 1930s liquidationism. If applied this would do grave damage to the world economy," he said.

... Central banks cannot ensure the sustainability of fiscal finances," it said. The emergencies policies have bought time for governments to put their budgets in order and tackle the deeper crisis of falling productivity, but this has been squandered. The reforms needed to clear out dead wood and unleash fresh energy. Productivity growth in the rich states has dropped from 1.8pc between 1980-2000, to 1.3pc from 2001-2007, has turned negative in Britain and Italy.

"Extending monetary stimulus is taking the pressure off those who need to act. In the end, only a forceful programme of repair and reform will return economies to strong and Piling on the pressure, the BIS said to call for draconian fiscal tightening to avert a future debt crisis across the big industrial economies, with Britain needing to slash its `primary GDP to meet ageing costs. "Public debt in most advanced economies has reached unprecedented levels in peacetime.

Even worse, official debt statistics understate the true scale of fiscal problems. The face a solvency constraint is a dangerous illusion. Bond investors can and do punish governments hard and fast." "Governments must redouble their efforts to ensure that their fiscal trajectories are sustainable. Growth will simply not be high enough on its own. Postponing the pain carries under stress – which is the current situation in a number of countries in southern Europe."

The call for double-barrelled fiscal and monetary contraction is remarkable, challenging the widely-held view that easy money is crucial to smooth the way for budget cuts and The BIS is in stark conflict with the International Monetary Fund and most Anglo-Saxon, French, and many Asian economists, as well as the team of premier Shinzo Abe in Japan. bitter dispute over the thrust of global economic policy at a crucial moment. Critics say the BIS is discrediting monetary remedies before it is clear whether the West is safely out of the woods.

It may now be much harder to push through fresh QE if it the gun with talk of early bond tapering. Scott Sumner from Bentley University said the BIS is wrong to argue that delaying exit from QE and zero rates is itself dangerous. The historical record from the US in 1937, is that acting too soon can lead to a serious economic relapse.

When the US did delay in 1951, the damage was minor and easily contained. Prof Sumner warned that Europe risks following Japan into a deflationary slump if it takes the advice of the BIS and persists with its current contraction policies.

Sorry to quote at length but this is a remarkable article and states clearly – remorselessly – what the top thinkers at the BIS seem to have in mind. Having watched central banking create a global crisis no less extreme than the Great Depression, they now seek to exacerbate it.

And just to make sure that no one misunderstands what is going on, they have apparently coordinated the Chinese tightening with Ben Bernanke's statement about a "taper" of current stimulus.

And why does the BIS call for a global depression? We'll leave that up for you to decide, dear reader. But what's going on today reminds us of our suspicions that the Great Depression was similarly manipulated and for similar reasons.

Chaos is ever a tool of globalism.

Conclusion: "Blood and destruction shall be so in use / And dreadful objects so familiar / That mothers shall but smile when they behold / Their infants quarter'd with the hands of war; / All pity choked with custom of fell deeds: / And Caesar's spirit, ranging for revenge, / With Ate by his side come hot from hell, / Shall in these confines with a monarch's voice / Cry 'Havoc,' and let slip the dogs of war; / That this foul deed shall smell above the earth / With carrion men, groaning for burial." – Shakespeare


June 24, 2013

BIS Warns The Monetary Kool-Aid Party Is Over

When a month ago the Central Banks' Central Bank, aka the Bank of International Settlements (or BIS) in Basel where the MIT central-planning braintrust meets every few months to decide the fate of the world, warned that the Fed-induced collateral shortage is distorting the markets, few paid attention. That the implication behind said warning was that QE can not continue at the current pace, was just as lost. A few short weeks later following the biggest plunge in markets since 2011 in the aftermath of Bernanke's taper tantrum, some are finally willing to listen.

However, they will certainly not like what the BIS just released as a follow up, both in the form of the BIS' 83rd Annual Report, and the speech by Jaime Caruana to commemorate said annual meeting. For the simple reason that it reads like a Zero Hedge sermon, which says, almost verbatim, that the days of kicking the can via flawed monetary policy are now over, and that the time for central banks to head for the exit has finally come.

The BIS message, as summarized by the FT, is that "central banks must head for the exit and stop trying to spur a global economic recovery... cheap and plentiful central bank money had merely bought time, warning that more bond buying would retard the global economy’s return to health by delaying adjustments to governments’ and households’ balance sheets."

Here is a better summary of the BIS' unprecedented U-Turn on its 5 year long monetary strategy, in its own selected words:
Can central banks now really do “whatever it takes”? As each day goes by, it seems less and less likely... Six years have passed since the eruption of the global financial crisis, yet robust, self-sustaining, well balanced growth still eludes the global economy. If there were an easy path to that goal, we would have found it by now. Monetary stimulus alone cannot provide the answer because the roots of the problem are not monetary. Hence, central banks must manage a return to their stabilisation role, allowing others to do the hard but essential work of adjustment. Many large corporations are using cheap bond funding to lengthen the duration of their liabilities instead of investing in new production capacity. Overindebtedness is one of the major barriers on the path to growth after a financial crisis. Borrowing more year after year is not the cure...in some places it may be difficult to avoid an overall reduction in accommodation because some policies have clearly hit their limits.
Of course, it would have been more useful for the BIS to reach this commonsensical conclusion some four years ago (or roughly when we started preaching to the choir, which now includes the BIS itself), instead of allowing the global private bank controlled syndicate known as "central banks" to inject $10 trillion into global capital markets in the past 4 years, and $16 trillion (a 500% increase!) since 2000.

Some of the "shocking" and painfully late observations on the chart above:
Since the beginning of the financial crisis almost six years ago, central banks and fiscal authorities have supported the global economy with unprecedented measures. Policy rates have been kept near zero in the largest advanced economies. Central bank balance sheets have doubled from $10 trillion to more than $20 trillion. And fiscal authorities almost everywhere have been piling up debt, which has risen by $23 trillion since 2007. In emerging market economies, public debt has grown more slowly than GDP; but in advanced economies, it has grown much faster, so that it now exceeds one year’s GDP.
Some of the other, just as "shocking" observations: a dramatic surge in artificially low bond yields will result in crippling, systemic losses, amounting to trillions of dollars for bond (and certainly stock) investors around the globe, to the tune of 8% of GDP losses in the US, and a mindblowing 35% of GDP in losses for Japanese investors:
Consider what would happen to holders of US Treasury securities (excluding the Federal Reserve) if yields were to rise by 3 percentage points across the maturity spectrum: they would lose more than $1 trillion, or almost 8% of US GDP (Graph I.3, right-hand panel). The losses for holders of debt issued by France, Italy, Japan and the United Kingdom would range from about 15 to 35% of GDP of the respective countries. Yields are not likely to jump by 300 basis points overnight; but the experience from 1994, when long-term bond yields in a number of advanced economies rose by around 200 basis points in the course of a year, shows that a big upward move can happen relatively fast. 
And while sophisticated hedging strategies can protect individual investors, someone must ultimately hold the interest rate risk. Indeed, the potential loss in relation to GDP is at a record high in most advanced economies. As foreign and domestic banks would be among those experiencing the losses, interest rate increases pose risks to the stability of the financial system if not executed with great care.

All of which Japan's "sophisticated", yet joyously cartoonish, "leaders" recently found out when they almost lost all control of the bond (and stock) market.
What's the "wealth effect" solution: why buy stocks but don't sell bonds. Or if selling bonds, do so vewy, vewy quietly. Alas, not even the BIS is dumb enough to fall for this (or push) possibility any longer.

The BIS report goes on, doing all it can to distance itself from those central banks who merely implemented policy that the BIS supported (and encouraged) for the past 5 years, but which has suddenly turned a cold shoulder. It does so by dramatically and rhetorically blasting a litany of questions to which it fully-well knows the answers:
How can central banks encourage those responsible for structural adjustment to implement reforms? How can they avoid making the economy too dependent on monetary stimulus? When is the right time for them to pull back from their expansionary policies? And in pulling back, how can they avoid sparking a sharp rise in bond yields? It is time for monetary policy to begin answering these questions.
Regardless of the politics behind the shift in BIS sentiment, the days of Mario Draghi's "whatever it takes" shriek of desperation are over. Here are some more of the key soundbites from the BIS report:
Originally forged as a description of central bank actions to prevent financial collapse, the phrase “whatever it takes” has become a rallying cry for central banks to continue their extraordinary actions. But we are past the height of the crisis, and the goal of policy has changed – to return still-sluggish economies to strong and sustainable growth. Can central banks now really do “whatever it takes” to achieve that goal? As each day goes by, it seems less and less likely. Central banks cannot repair the balance sheets of households and financial institutions. Central banks cannot ensure the sustainability of fiscal finances. And, most of all, central banks cannot enact the structural economic and financial reforms needed to return economies to the real growth paths authorities and their publics both want and expect. 
What central bank accommodation has done during the recovery is to borrow time – time for balance sheet repair, time for fiscal consolidation, and time for reforms to restore productivity growth. But the time has not been well used, as continued low interest rates and unconventional policies have made it easy for the private sector to postpone deleveraging, easy for the government to finance deficits, and easy for the authorities to delay needed reforms in the real economy and in the financial system. After all, cheap money makes it easier to borrow than to save, easier to spend than to tax, easier to remain the same than to change. 
Yes, in some countries the household sector has made headway with the gruelling task of deleveraging. Some financial institutions are better capitalised. Some fiscal authorities have begun painful but essential consolidation. And yes, much of the difficult work of financial reform has been completed. But overall, progress has been slow, halting and uneven across countries. Households and firms continue to hope that if they wait, asset values and revenues will rise and their balance sheets improve. Governments hope that if they wait, the economy will grow, driving down the ratio of debt to GDP. And politicians hope that if they wait, incomes and profits will start to grow again, making the reform of labour and product markets less urgent. But waiting will not make things any easier, particularly as public support and patience erode. 
Alas, central banks cannot do more without compounding the risks they have already created. Instead, they must re-emphasise their traditional focus – albeit expanded to include financial stability – and thereby encourage needed adjustments rather than retard them with near-zero interest rates and purchases of ever larger quantities of government securities. And they must urge authorities to speed up reforms in labour and product markets, reforms that will enhance productivity and encourage employment growth rather than provide the false comfort that it will be easier later.
* * *
As governments responded to the financial crisis with bank bailouts and fiscal stimulus, their indebtedness rose to new highs. And in countries that experienced a housing bubble in the run-up to the crisis, households had already accumulated large debts. In the half-decade since the peak of the crisis, the hope was that significant progress would be made in the necessary deleveraging process, thereby enabling a self-sustaining recovery.
However, that never happened.
Easy financial conditions can do only so much to revitalise long-term growth when balance sheets are impaired and resources are misallocated on a large scale. In many advanced economies, household debt remains very high, as does non-financial corporate debt. With households and firms focused on reducing their debt, a low price for new credit is not terribly relevant for spending. Indeed, many large corporations are using cheap bond funding to lengthen the duration of their liabilities instead of investing in new production capacity. It does not matter how attractive the authorities make it to lend and borrow – households and firms focused on balance sheet repair will not add to their debt, nor should they. 
And, most of all, more stimulus cannot revive productivity growth or remove the impediments that block a worker from shifting into a promising sector. Debt-financed growth masked the downward trend in labour productivity and the large-scale distortion of resource allocation in many economies. Adding more debt will not strengthen the financial sector nor will it reallocate resources needed to return economies to the real growth that authorities and the public both want and expect.
* * *
Six years have passed since the eruption of the global financial crisis, yet robust, self-sustaining, well balanced growth still eludes the global economy. If there were an easy path to that goal, we would have found it by now. Monetary stimulus alone cannot provide the answer because the roots of the problem are not monetary. Hence, central banks must manage a return to their stabilisation role, allowing others to do the hard but essential work of adjustment. 
Authorities need to hasten labour and product market reforms so that economic resources can shift more easily to high-productivity sectors. Households and firms have to complete the difficult job of repairing their balance sheets, and governments must intensify their efforts to ensure the sustainability of their finances. Regulators have to adapt the rules to a financial system that is becoming increasingly interconnected and complex and ensure that banks have sufficient capital and liquidity buffers to match the associated risks. Each country needs to tailor the reform agenda to maximise its chances of success without endangering the ongoing economic recovery. But, in the end, only a forceful programme of repair and reform will return economies to strong and sustainable real growth.
* * *
Ultimately, outsize public debt reduces sovereign creditworthiness and erodes confidence. By putting their fiscal house in order, governments can help restore the virtuous cycle between the financial system and the real economy. And, with low levels of debt, governments will again have the capacity to respond when the next financial or economic crisis inevitably hits. 
The BIS conclusion:
Is this a call for undifferentiated, simultaneous and comprehensive tightening of all policies? The short answer is no. Concrete measures need to be tailored to country-specific circumstances and needs. And the timing need not be simultaneous, although in some places it may be difficult to avoid an overall reduction in accommodation because some policies have clearly hit their limits
Ours is a call for acting responsibly now to strengthen growth and avoid even costlier adjustment down the road. And it is a call for recognising that returning to stability and prosperity is a shared responsibility. Monetary policy has done its part. Recovery now calls for a different policy mix – with more emphasis on strengthening economic flexibility and dynamism and stabilising public finances.
Finally, today’s large flows of goods, services and capital across borders make economic and financial stability a shared international responsibility. Cross-border effects of domestic policy action are intrinsic to globalisation. Understanding spillovers and finding ways to avoid the unintended effects is central to the work of the BIS. And continued discussions among central banks and supervisors – discussions that the BIS facilitates and promotes – are essential for avoiding national biases in policymaking. Such national bias runs the risk of undermining globalisation and thus blocking the road to sustained growth for the global economy.
And yes, the central banks' central bank really did say all of the above. Unpossible the Keynesian Magic Money Tree growers will say: surely there is an error in the BIS excel model...
Those pressed for time, if unable to read the full 204 page annual report, should at least read the following stunning speech from Jaime Caruana, General Manager of the BIS, titled "Making the most of borrowed time." (only 9 pages - pdf here). Because, if nothing else, it validates everything Zero Hedge has said for the past 4 years.


June 21, 2013

Bernanke Kills Fed Credibility and the Confidence Fairy in One Shot

How many markets are in upheaval right now? The ten year Treasury has gone from 2.18% to 2.44% in less than a day. Gold is down to $1288. Asia had a bad night with the Chinese interbank market going into even more distress than before (that can’t be laid mainly at the Fed’s doorstep but it sure didn’t help). The Nikkei was down 1.7%, which is almost a routine market move, but the Hang Seng also fell 2.9%. All major European stock markets are down over 2%. S&P future are down over 16 points, or roughly 1%.

We’ve pointed to several things that have been troubling about the Fed’s apparent view prior to the FOMC statement yesterday and the Bernanke press conference, which only rattled investors further. First was that the Fed seems to be suffering from a bad case of confirmation bias, in that it seems to be underweighing data that is inconsistent with the idea that the economy is getting better (as in on the path to decent growth, as opposed to a gear or two above stagnation). For instance, even though inflation continues to fall (a sign of weakness) the central bank is taking the view that that’s temporary, and it is also of the view that the sequester isn’t going to impose a meaningful drag.

But that may not matter. Fedwatcher Tim Duy highlights the fact that the Fed has a pattern of being too optimistic about growth, but is likely to stick to its guns on exiting QE when its unemployment thresholds are breached. And the big fail is that the Fed using the headline unemployment rate as one of its main metrics for when to wind down QE means it is choosing to stick its head in the sand as far as the severity of underemployment is concerned. This is the economic version of “peace with honor”.

Frankly, the real issue seems to be that the Fed has gotten itchy about ending QE. Who knows why. It may be 1937 redux, that they’ve gotten impatient with the length of time they’ve been engaged in extraordinary measures. It may be that they can’t face up to the fact that they might have gotten into a Japan-style QE forever (I believe Japan is now on QE 8). They might also worry about political backlash if the Fed balance sheet keeps growing, or that savers and investors are suffering in a low yield environment (more likely they are concerned about depriving banks of easy profits, like real earnings on float or easy yield curve profits). John Plender suggested in the Financial Times that Bernanke may be following the view of a recent Frederic Miskin paper, in which Miskin took the view that the Fed window for a QE exit was closing.

I’ve been musing that the impact of QE might well be asymmetrical, that it did less to goose the economy than the Fed wanted. Its main impact has been to lift asset prices. Some studies have confirmed Richard Koo’s take on a balance sheet recession, that consumers prioritize paying down debt over spending, and so the rise in the stock market and recovery in home prices hasn’t led to as much increase in spending as you’d expect. But as I speculated, while lowering interest rates doesn’t do much to stimulate demand in the real economy, raising rates will slow growth in normal times. And it could do more to choke off the nascent recovery than the Fed has anticipated.

The big problems are the Fed has no idea how to exit and this problem results from the flawed design of QE, of targeting quantities rather than rates. So the one thing Bernanke sort of made clear yesterday is the Fed will make up its mind as the data comes in. That’s not exactly the sort of guidance Mr. Market was looking for. He also raised the growth target and suggested the taper might start as early as September. Freakout! Even though Bernanke had made noises about an exit last month, and the the bond market took badly to that, the failure of Fed minions to offer any reassurance in the meantime was a warning of sorts that not enough people heeded.

To make the lack of clarity even more confusing, the central bank had previously said 6.5% was the unemployment level it was looking for. Whoops, in practice, that means it will start tapering earlier, at 7%. That might have been understood by some careful Fed tea-leaf watchers, but most investors had seen 6.5% as far enough away as to only be clouds on the horizon. With the Fed raising its growth forecast and talking about a possible taper in 2013, suddenly it’s looking very immediate in some quarters.

The communication bolix is producing what it is almost certain that Bernanke did not want right now, a further increase in real yields after a marked rise last month.

Clive Crook at Bloomberg makes a good stab at trying to unpack Bernanke’s “transparent as mud” discussion:
Bernanke triggered the recent rise in long-term bond yields when he said last month that “in the next few meetings, we could take a step down in our pace of purchases.” You could argue that he was merely stating the obvious, but the markets took it as important new information. In itself, that needn’t have been troubling. The problem for the Fed is that investors didn’t interpret it as good news about the economy but as bad news about the Fed’s reliability. 
As the economy strengthens, you’d expect long-term interest rates to rise. But the recent rise in bond yields coincided with unexciting jobs data and very low inflation — inconsistent with the “strong economy” story. The implication is that investors thought the Fed was bringing forward its plans not just to taper QE but also, crucially, to start raising short-term interest rates. 
Bernanke tried to address this confusion this week. He emphasized for the umpteenth time that the decision on tapering QE is separate from the decision on starting to raise short-term rates. All being well, tapering would probably start later this year, he said, with asset purchases continuing in 2014 until unemployment falls to 7 percent. 
Interest rates won’t rise, the Fed has previously said, until unemployment has fallen to 6.5 percent. And, Bernanke added with fresh emphasis, perhaps not even then: These numbers are “thresholds” not “triggers.” So the Fed will merely start thinking about raising interest rates once unemployment falls to 6.5 percent, and might well choose not to act at that point. Oh, and it’s always possible, the chairman told another questioner, that the unemployment threshold for interest rates (and presumably therefore also for QE) will be revised — more likely down than up.
You can see what a crazy place we’ve gotten to be with ZIRP plus QE. Raising short term rates at 6.5% unemployment, when that’s certain to be a gross understatement about how weak the job market really is? What that really signifies is the mistake that Bernanke made during the crisis, and too few have called him out on, was his “75 [basis point] is the new 25″ Fed fund rate cuts. 25 used to be sufficient to reassure markets, and 75 was seen as panicked but too quickly became a new normal. I had the dim feeling that the Fed had crossed an event horizon when it dropped the Fed fund rate below 1.5%. Even 1% might have been less confining than where it wound up.

Bill Gross in a Bloomberg interview has a good take on where this is likely to wind up but, but it’s a long way from what Mr. Market and even the Fed seems to believe now:
I think they are missing the influence on inflation that obviously the chairman has considered and perhaps the committee as well. There was a question and Q&A that basically said, Mr. Chairman, if we are down at 1% inflation and it doesn’t rise, then real interest rates are in a quandary to which you have limited flexibility, and he said, I agree completely with the premise of your question. I would think the markets are looking at the 7% unemployment rate and suggesting the tapering will end at that point. I would suggest that yes, he did say 7% in terms of an unemployment target where tapering would end, presumably in 2014, but he also qualified significantly a number of times that inflation has to go back up towards that 2% target and at the moment we are not there. Those who are selling treasuries in anticipation that the Fed will ease out of the market might be disappointed unless we have inflation close to 2%… 
I think the Chairman is almost deathly afraid and we have witnessed in speeches going back five or 10 years on the part of the chairman in terms of the helicopter speech and the reference not only to the depression but to the lost decades in Japan. I think he is deathly afraid of deflation. As we meander back and forth around the 1% level, i would suggest that the chairman to the extent that he perhaps has a limited time left in terms of being the Chairman, that he would guide the committee towards not only an unemployment rate which has been emphasized in terms of the Q&A but also towards a higher inflation target, which is really a target. It’s not something in terms of a cap, but the inflation target of 2% and for the next year or two, 2.5% has been specifically delineated in terms of that. It’s a target. Those who think it is a cap and we are 1% below the cap and therefore the Fed doesn’t care about it, I think the chairman told us the Fed does care about it and the closer we get to 2%, the better as far as he’s concerned.
TIPS and gold are continuing to say there’s no inflation in the offing. The big fail in the Fed’s forecast is it’s keen to believe it’s succeeding and continuing low or falling inflation amounts to a repudiation. And if it’s proven wrong on that front, that means spooking the markets and increasing real interest rates now wasn’t just creating some inevitable adjustments a smidge prematurely but a more serious error.

Update 8:30 AM. Krugman (hat tip Scott) is also seeing shades of 1937 in this move, and for similar reasons, that the Fed is choosing to look at the headline unemployment numbers and not at the state of the labor markets:
….the fact is that we are still a very long way from acceptable employment levels. Meanwhile, inflation remains below the Fed’s target. Maybe the Fed believes that the situation will improve — but as everyone points out, the Fed has been consistently over-optimistic since the crisis began. And for now the economy still needs all the help it can get. 
How can the Fed help? With short-term rates up against the zero lower bound, mainly through expectations — by conveying the message that it will wait to tighten, that it will let the economy recover and allow inflation to rise before hiking rates. To use my old phrase, it must credibly promise to be irresponsible. 
And what it has just done, instead, is signal that it’s still a conventionally minded central bank. 
So what if recovery stalls, and inflation expectations fall even further? Can the Fed turn on a dime, and send a credible message that it really isn’t so conventional-minded, after all? It’s hard to believe; having already shown itself inclined to start snatching away the punch bowl before the party even starts, it has arguably already given away the game…
I really hope that the real economy recovers at a pace that makes my fears groundless. But if it doesn’t, I fear that the Fed has just done more damage than it seems to realize.

June 20, 2013

Central Banking: From Bad to Worse

Ben Bernanke under pressure to spell out QE timeline ... Ben Bernanke under pressure to spell out QE timeline. US stocks jumped and the dollar climbed against the yen on Monday, amid expectations that Federal Reserve chairman Ben Bernanke will spell out how it will decide when to put the brakes on America's quantitative easing programme, at its two-day meeting this week. Ben Bernanke cautioned strongly that halting America's fiscal stimulus measures too suddenly could jeopardise the country's recovery. – UK Telegraph

Dominant Social Theme: One man stands between civilization and chaos.

Free-Market Analysis: Another quietly adulatory article.

One would not think, given the continued coverage of Federal Reserve chairman Ben Bernanke and other powerful central bankers, that the prestige of the entire institution has come under considerable attack in the past decade and the past five years in particular.

Gone are the days when Alan Greenspan, Bernanke's predecessor, was greeted as a kind of deity by US politicians when he made a rare appearance to explain the Fed's current actions in loquacious, indecipherable detail.

Watching Alan Greenspan was like watching a Hollywood version of what a Federal Reserve chairman was supposed to be like. Narrow, gaunt, as angular as a number, Greenspan spoke an elegant mumbo jumbo that everyone appreciated with the exception of perhaps his old nemesis, the libertarian-conservative Congressman Ron Paul.

In those days, Ron Paul was nothing but a curiosity to most observers on the Hill. Nicknamed "Dr. No" because he tended to vote "no" on any legislation he believed ran counter to the Constitution, Paul was regarded with the same kind of benevolent amusement as Greenspan himself, with a difference, though ...

Paul was amusing because he was Congress's resident crank. Greenspan was amusing because he was perhaps the world's most powerful man and relished the role. People laughed at Ron Paul, and then they laughed WITH Alan Greenspan.

How things have changed. Ron Paul is one of the most popular politicians in the US and Alan Greenspan has virtually retired from public life, unable to command the kind of adulatory audiences he once did. His is widely blamed, along with Ben Bernanke, for engineering the current, ongoing Great Recession by allowing monetary stimulation to get out of control.

The mainstream media still doesn't "get it," however. In this article excerpted above, we find an unchanged and quietly adulatory perspective. Mainstream journalism treads the weary narrative furrow much as it did in the 20th century even though public opinion has moved on.

People don't trust either central banking or central bankers these days, blaming them correctly for the latest global economic downturn. You won't know it from this article.

Here's more:

Mr Bernanke is also expected to reassure investors that the $85bn a month bond buying scheme can be stepped up again, even after the brakes are applied, in an attempt to ease market concerns that America is about to embark on a total withdrawal from QE.

Markets have experiences an unusually volatile few weeks, following the Fed chairman's warning last month that it could start winding down the programme "in the next few meetings" if economic data continued to show that America was well on the road to recovery.

He also cautioned strongly that halting America's fiscal stimulus measures too suddenly could jeopardise the country's recovery, but investors focused on the possibility of the US reining in its bond buying sooner than previously expected. Since then, most positive data which shows America is returning to health has sparked a drop in markets, whilst bad news about the economy has bolstered investor confidence.

... Some economists have predicted that the Fed will map out a detailed timeline for tapering after its meeting this week, but others think that it does not have enough information for this to have any real meaning at this stage.

This article provides a 20th century analysis (as much of the mainstream still does) of central banking establishment still firmly in control of its destiny and the world's economic future.

But people are not laughing with the Fed anymore, as they did in the latter part of the 20th century and especially under parts of Greenspan's regime. There is no subdued affection for the Fed chairman. There is no reservoir of good will for an institution that has virtually bankrupted billions of people around the world.

Today, thanks to what we call the Internet Reformation, people do understand once again the true price-fixing nature of central banking. They have seen the destruction of its policies and they have no faith, nor should they.

Conclusion: And as the Fed and other central banks try to remove the tens of trillions that they have injected into the world's economy over the past five years – and inevitably fail – we can say with some certainty that the worst is yet to come.


June 19, 2013

David Stockman's Non-Recovery Part 2: The Crash Of Breadwinners And The 'Born-Again' Jobs Scam

After exposing the faux prosperity of the immediate post-2009 "wholly unnatural" recovery and explaining the precarious foundation of the Bernanke Bubble, David Stockman's new book 'The Great Deformation' delves deeper (in Part 2 of this 4-part series) into the dismal internals of the jobs numbers and only the utterly politicized calculation of the “unemployment rate” that disguises the jobless nature of the rebound. To be sure, the Fed’s Wall Street shills breathlessly reported the improved jobs “print” every month, picking and choosing starting and ending points and using continuously revised and seasonally maladjusted data to support that illusion. Yet the fundamentals with respect to breadwinner jobs could not be obfuscated.

Via David Stockman's book The Great Deformation,

The Wall Street meltdown of September 2008 accelerated the recessionary forces already in motion, causing a total job loss of 7.3 million between the December 2007 peak and the end of the recession in June 2009. That the Fed’s bubble finance had camouflaged the failing internals of the American economy then became starkly apparent. Nearly three-fourths of this reduction was accounted for by the above mentioned loss of 5.6 million breadwinner jobs; that is, nearly 8 percent of their pre-recession total. That devastating hit left the nation with only 66.2 million prime jobs and set the clock back to the level of early 1998. This is an astonishing fact: before any of the Greenspan-Bernanke maneuvers to coddle Wall Street and pump up the wealth effects elixir—that is, the 1998 LTCM bailout, the 2001–2003 rate-cutting panic, the August 2007 Bernanke Put, and the Fed’s post-Lehman tripling of its balance sheet - there were more breadwinner jobs than there are today. Since the BlackBerry Panic the Fed has relentlessly pumped freshly minted cash into the bank accounts of the twenty-one government bond dealers. Not surprisingly, therefore, there has been a jarringly divergent outcome between Wall Street and Main Street.

By September 2012, the S&P 500 was up by 115 percent from its recession lows and had recovered all of its losses from the peak of the second Greenspan bubble. By contrast, only 200,000 of the 5.6 million lost breadwinner jobs had been recovered by that same point in time. To be sure, the Fed’s Wall Street shills breathlessly reported the improved jobs “print” every month, picking and choosing starting and ending points and using continuously revised and seasonally maladjusted data to support that illusion. Yet the fundamentals with respect to breadwinner jobs could not be obfuscated.

On the eve of the 2012 election, for example, there were 18.3 million jobs in the goods-producing sectors: manufacturing, mining, and construction. These core sectors of the productive economy had taken a beating during the Great Recession, shedding 3.5 million jobs, or 15 percent. Yet after three and a half years of so-called recovery, the jobs count in the goods-producing sectors had not rebounded in the slightest; it had actually declined slightly from the 18.5 million jobs recorded at the end of the recession in June 2009.

Likewise, there were 7.8 million jobs in finance, insurance, and real estate, meaning virtually no gain from the 7.7 million jobs at the end of the recession. As to lawyers, accountants, engineers, architects, and computer designers, there was no pick-up there, either: the 5 million jobs counted by the BLS in September 2012 barely exceeded the 4.8 million recorded in June 2009; and in the information industries—publishing, broadcasting, telecommunications, motion pictures, and music—the data had slightly deteriorated, with the 2.8 million jobs posted in June 2009 slipping to 2.6 million in the month before the 2012 election.

Similarly, the 10 million jobs in transportation and wholesale distribution in September 2012 had changed hardly a tad from June 2009. Finally, the other heavy-duty category of breadwinner jobs—that is, government employment (outside of education) where average compensation exceeds $65,000 annually—had actually gone south. The 11 million of these high-paying jobs on the eve of the 2012 election had shrunk by more than 4 percent since the recession ended in June 2009.

In short, after forty months of “recovery” there was virtually no change in every category of breadwinner jobs that had been slammed by the Great Recession.


These data are extremely important. They belie the sunny paint-by-numbers jobs picture peddled by the Fed to distract the public from the fact that monetary policy is all about fueling the speculative urges of Wall Street, not the economic health of Main Street. This obfuscation is especially true with respect to the aforementioned headline gain of 3 million jobs. Never told is the fact that the majority of these, as indicated above, were part-time jobs in bars, restaurants, retail emporiums, and temporary employment agencies.

That fully 55 percent of the rebound has been in low-paying, part-time jobs not only illuminates the phony nature of the Fed’s so-called recovery, but it also comes with a news flash; namely, every one of these 1.6 million new part-time “jobs” had already been “created” once before. During the second Greenspan bubble the part-time job count had risen from 34.7 million in early 2000 to 37.2 million in December 2007. In still another episode of Charlie Brown and Lucy, however, the football had been moved backward during the Great Recession. By June 2009, in fact, the part-time job count had tumbled all the way back to its turn of the century starting point at 34.7 million.

What happened by election eve of 2012, therefore, was nothing more than a partial retracement. At that point the BLS reported 36.4 million part-time jobs, meaning that after three and a half years of “recovery” just 60 percent of the gain from the 2000–2007 bubble had been recouped. These were self-evidently “born again” jobs, but in a display of astounding cynicism the Bernanke Fed claimed to be meeting its statutory mandate to promote maximum employment.

The larger truth is that when these job rebirths are set aside there isn’t much left. The part-time job sector has gained an average of just 11,000 authentically new jobs per month during the twelve years between early 2000 and September 2012, thereby contributing hardly a drop in the bucket relative to the working-age population growth at 150,000 per month.

In fact, this “born again” syndrome actually applies to the entire non-farm payroll, and the modest rebound it has registered since the recession officially ended in June 2009. As shown by the data, the Greenspan-Bernanke policy was the monetary equivalent of a Billy Graham crusade: the same jobs got “saved” over and over.

Thus, there had been 130.8 million total jobs in January 2000, and this figure had reached 138.0 million by the December 2007 peak. The Great Recession sent the jobs count tumbling all the way back to the starting point, actually dipping slightly lower to 130.6 million by June 2009. Then, after forty months of “recovery,” the BLS reported 133.5 million nonfarm payroll jobs for September 2012. The Bernanke bubble had thus “recreated” only 40 percent of the jobs that had been “created” by the Greenspan bubble the first time around.

That the Bernanke bubble policies have not recouped even half of the total payroll gains that the Fed had already previously counted is still another testament to the sham nature of the “recovery.” When the Fed’s pump-and-dump cycling of the macro-economy is set aside, it becomes starkly evident that the American economy has been nearly bereft of sustained job growth. For the entire twelve-year period since early 2000, it has generated a net gain of only 18,000 jobs per month, a figure that is just one eighth of the labor force growth rate.

The reason for this anemic figure on total payroll growth is that the great expanse of the nation’s economy outside of the HES complex has been a jobs disaster area. Alongside the rounding-error growth in the part-time sector, the 66.4 million breadwinner jobs in September 2012 represented a drastic shrinkage from the approximate 72 million jobs in that category recorded in January 2000. This was the smoking gun: the prime breadwinner jobs market has been shrinking by a net of 35,000 jobs per month for more than twelve years!

Indeed, the tiny gain of 5,000 breadwinner jobs per month since June 2009 means that it would take 90 years to recoup the 5.6 million such jobs lost during the recession; that is, it would take until the twenty-second century to get back to the job count that existed at the end of the twentieth century! The absurdity of it surely puts paid to the notion that a conventional business recovery is underway.

Indeed, it is only the utterly politicized calculation of the “unemployment rate” that disguises the jobless nature of the rebound. Upward of 8 million working-age Americans were no longer classified as being in the labor force due to purely arbitrary counting rules. In fact, the unemployment rate on the eve of the 2012 election would have posted at about 13 percent based on the same labor force participation rate as January 2000, and would have clocked closer to 20 percent if further adjusted for the drastic shift from full-time to part-time employment.


June 18, 2013

David Stockman's Non-Recovery Part 1: Post-2009 Faux Prosperity

Few others are better equipped to comprehend both the insider's and outsider's perspective on what the government, the Fed, and the banks are doing in this so-called 'recovery' we are experiencing than David Stockman. Nowhere does he detail this better than Chapter 31 of his new book 'The Great Deformation'. In this first part (of a four-part series), he explains just what happened after the US economy liquidated excess inventory and labor and hit its natural bottom in June 2009. Embarking upon a halting but wholly unnatural "recovery," doing nothing but igniting yet another round of rampant speculation in the risk asset classes. The precarious foundation of the Bernanke Bubble is starkly evident in the internal composition of the jobs numbers.

Via David Stockman's book The Great Deformation,

After the US economy liquidated excess inventory and labor and hit its natural bottom in June 2009, it embarked upon a halting but wholly unnatural “recovery.” The artificial prolongation of the Bush tax cuts, the 2 percent payroll tax abatement and the spend-out of the Obama stimulus pilfered several trillions from future taxpayers in order to gift America’s present day “consumption units” with the wherewithal to buy more shoes and soda pop.

But there has been no recovery of the Main Street economy where it counts; that is, no revival of breadwinner jobs and earned incomes on the free market. What we have once again is faux prosperity. In fact, the current Bernanke Bubble is an even sketchier version of the last one and consists essentially of the deliberate and relentless reflation of financial asset prices.

In practice, this amounts to a monetary version of “trickle down” economics. By September 2012, personal consumption expenditure (PCE) was up by $1.2 trillion from the prior peak, representing a modest 2.2 percent per year (0.6 percent after inflation) gain from the level of late 2007. Yet half of this gain—more than $600 billion—reflected the massive growth of government transfer payments, and much of the rebound which did occur in private consumption spending was concentrated in the top 10–20 percent of households. In short, the Fed’s financial repression policies enabled Uncle Sam to fund transfer payments for the bottom rungs of society at virtually no carry cost on the debt, while they juiced the top rungs with a wealth effects tonic that boosted spending at Nordstrom’s and Coach.

The Fed’s post-Lehman money printing spree has thus failed to revive Main Street, but it has ignited yet another round of rampant speculation in the risk asset classes. Accordingly, the net worth of the 1 percent is temporarily back to the pre-crisis status quo ante. Needless to say, successful speculation in the fast money complex is not a sign of honest economic recovery: it merely marks the prelude to another spectacular meltdown in the canyons of Wall Street next time the music stops.


The precarious foundation of the Bernanke Bubble is starkly evident in the internal composition of the jobs numbers. At the time the US economy peaked in December 2007, there were 71.8 million “breadwinner” jobs in construction, manufacturing, white-collar professions, government, and full-time private services. These jobs accounted for more than half of the nation’s 138 million total payroll and on average paid about $50,000 per year—just enough to support a family.

Breadwinner jobs also generated more than 65 percent of earned wage and salary income and are thus the foundation of the Main Street economy. Yet after a brutal 5.6 million loss of breadwinner jobs during the Great Recession, a startling fact stands out: less than 4 percent of that loss had been recovered after 40 months of so-called recovery.

The 3 million jobs recovered since the recession ended in June 2009, in fact, have been entirely concentrated in the two far more marginal categories that comprise the balance of the national payroll. More than half of the recovery (1.6 million jobs) occurred in what is essentially the “part-time economy.” It presently includes 36.4 million jobs in retail, hotels, restaurants, shoe-shine stands, and temporary help agencies where average annualized compensation was only $19,000. This vast swath of the jobs economy—27 percent of the total—is thus comprised of entry level, second earner, and episodic jobs that enable their holders to barely scrape by.

The balance of the pick-up (1.1 million jobs) was in the HES Complex, which consists of 30.7 million jobs in health, education, and social services. Average compensation is slightly better at about $35,000 annually and this category has grown steadily for years. Its increasingly salient disability, however, is that it is almost entirely dependent on government spending and tax subsidies, and thus faces the headwind of the nation’s growing fiscal insolvency.

When viewed in this three category framework, the nation’s job picture reveals a lopsided aspect that thoroughly belies the headline claims of recovery. A healthy Main Street economy self-evidently depends upon growth in breadwinner jobs, but there has been none, even during the bubble years before the financial crisis. The Bureau of Labor Statistics (BLS) reported 71.8 million breadwinner jobs in January 2000, yet seven years later in December 2007—after the huge boom in housing, real estate, household consumption, and the stock market—the number was still exactly 71.8 million.

The faux prosperity of the Fed’s bubble finance is thus starkly evident. This is the single most important metric of Main Street economic health, and not only had there been zero new breadwinner jobs on a peak-to-peak basis, but that alarming fact had been completely ignored by the smugly confident monetary politburo.

Alas, the latter was blithely tracking a feedback loop of its own making. Flooding Wall Street with easy money, it saw the stock averages soar and pronounced itself pleased with the resulting “wealth effects.” Turning the nation’s homes into debt-dispensing ATMs, it witnessed a household consumption spree and marveled that the “incoming” macroeconomic data was better than expected. That these deformations were mistaken for prosperity and sustainable economic growth gives witness to the everlasting folly of the monetary doctrines now in vogue in the Eccles Building.

To be sure, nominal GDP did grow by 40 percent, or about $4 trillion, between 2000 and 2007. Yet there should be no mystery as to how it happened. As has been noted, total debt outstanding grew by $20 trillion during that same period. The American economy was thus being pushed forward by a bow wave of debt, not pulled higher by rising productivity and earned income.

Indeed, the modest gain of 7.5 million jobs during those seven years reflected exactly this debt-driven dynamic and explains why none of these job gains were in the breadwinner categories. Instead, about 2.5 million were accounted for by the part-time economy jobs described above. On an income-equivalent basis these were actually “40 percent jobs” because they represented an average of twenty-five hours per week and paid $14 per hour, compared to a standard forty-hour work week and a national average wage rate of $22 per hour. Thus, spending their trillions of MEW windfalls at malls, bars, restaurants, vacation spots, and athletic clubs, homeowners and the prosperous classes, in effect, temporarily hired the renters and the increasing legions of marginal workers left behind.

Likewise, another 5 million jobs were generated in the HES (health, education, and social services) complex. Here the job count grew by 20 percent, but it was mainly due to the fact that the sector’s paymasters - government budgets and tax-preferred employer health plans - were temporarily flush.

As discussed in part 2 of this series, however, these, too, were “debt-push” jobs that paid modest wages. While the steady 2.6 percent annual growth of HES jobs during the second Greenspan Bubble did flatter the monthly employment “print,” it was possible only so long as government and health plans could keep spending at rates far higher than the growth rate of the national economy.